Modest world growth forecast for 2016

Eminent experts and thought leaders from international organizations including the World Bank, the International Monetary Fund (IMF), the World Economic Forum (WEF) and Foreign Affairs magazine presented in-depth analyses and forecasts on the state of the Arab region and the world at large focusing on the economic and political landscape as part of the eighth Arab Strategy Forum in Dubai on Tuesday.

World Bank

Ayhan Kose, Director of the World Bank Group's Development Prospects Group, presented a report titled ‘Global Economic Prospects’ highlighting changes in the global economic landscape.

The report forecasts a modest improvement in growth for 2016 –2017 due to weak capital flows, weak global trade and weak commodities markets. It also takes into consideration a number of risks that could slow down the world economy.  Among  these risks is a sharp slump in emerging economies and  possible spillovers from growth shocks in the Brics countries, which could be sizeable for not only other emerging markets but for the global economy as a whole. The report also suggests a one percent decline in Brics growth could lead to an almost two percent decline in emerging and frontier markets.

Other major risks presented in the report were financial market turbulence, geopolitical risks and tail risks. For the first, the risk includes rising US interest rates, heightened risk aversion, fragile liquidity conditions and deteriorating credit worthiness. On the geopolitical front, possible terrorist attacks, if not isolated, can in addition to geopolitical tensions have major regional and global repercussions. For tail risks, the underlying issues can lead to a disorderly slowdown in large emerging markets combined with financial turbulence.

Stressing the importance of effective monetary policies as well as the challenges related to monetary policies, fiscal policies and structural policies, the report also presents the need for emerging economies in particular to invest, innovate and improve institutions.

International Monetary Fund

In his report, Masood Ahmed, Director of the International Monetary Fund's Middle East and Central Asia Department, predicted that global growth will reach 3.6 per cent in 2016, 0.5 per cent higher than in 2015. This is attributed to modest recovery of advanced economies and resurgence in emerging markets. The projection depends on a confluence of favorable factors, including major advanced economies continuing to benefit from supportive monetary conditions and lower commodity prices and a resulting pick-up in emerging markets and developing countries as growth among distressed economies recovers.

The report highlights high risks that include spillovers from China’s growth transition, financial challenges due to dollar appreciation and tighter global financing conditions in addition to geopolitical tensions and related consequences.

For the Arab region, three factors are set to dominate the economic outlook - oil prices, impact of regional conflicts, and political and social transitions in countries that experienced the Arab Spring.

For oil exporting countries, except for Qatar and Kuwait, 2015 will end with budget deficits due to reduced oil prices, declining more than 50 per cent from the levels in the summer of 2014. Such deficits have also started to trickle down and affect non-oil economic activities. Although the IMF predicts that oil prices will rise slowly, they are likely to remain relatively low until at least 2020. Therefore these countries need to prepare for a multi-year adjustment that will require reduced spending and increased taxation.

Conflict in the region notably in Syria and Yemen had numerous effects. Besides the devastating human cost, consequences have spread to neighboring countries that have witnessed the impact on their tourism and trade industries.

The outlook looks positive for some Arab countries that experienced the Arab Spring. Egypt’s investment conference and plans for structural reforms have boosted confidence, doubling growth to a projected 4.3 per cent in 2016. Similarly, steadfast policy implementation has helped stabilize the economy in Morocco, where growth is projected at some 3.7 per cent in 2016. However, on the other side of the spectrum, growth is inhibited in Lebanon, Tunisia and Jordan due to regional conflicts.
 
World Economic Forum

Margareta Drzeniek. Head of Global Competitiveness and Risks, for the World Economic Forum presented an exclusive preview of ‘The Global Risks’ report 2016, highlighting the most likely global risks to occur in in the region in 2016.

Foreign Affairs

Dr. Gedeon Rose, Editor of Foreign Affairs, presented the magazine’s predictions for 2016. This report forecasts political and economic trends in 2016 through a comprehensive analysis of current global events. According to the magazine, the Middle East region, Ukraine, South and East China Seas will continue to be the key conflict areas and geopolitical hotspots.

The Arab region faces the potential of a new proxy war in the Middle East with the current turbulences likely to escalate well into 2016. The report highlights the advancement of Daesh in recent years and its transformation from a local faction into a leading force globally. The terror group now controls a significant portion of eastern Syria and western Iraq along with outposts elsewhere in the region and has recently demonstrated its ability and willingness to attack Western targets of all kinds. According to the report, the West is likely to increase external pressure on Daesh but will fail to defeat it in the short term.

For oil exporting countries, Foreign Affairs suggests that low oil prices, persistent failure to diversify economies, civil wars and their spillover effects, and less than average educational opportunities will not allow the Arab world's economic problems to improve in 2016. However, the Gulf countries in particular will do better than their neighbors. Over a slightly more extended timeframe, the answer will depend on where oil prices go. The most likely scenario according to the report is that oil prices will continue to remain volatile, neither remaining high nor low for long periods of time.  Increases will therefore be small but real.

The UAE has successfully implemented some rationalization of energy prices for the consumer with no difficulties, but it is not yet clear whether such progress will be replicated in other countries. Should such policies spread across the region, the results might eventually include better budget balances, but some difficulties.

The region will also face additional pressures related to the refugee crisis especially in Jordan, Lebanon, and Kurdistan and potentially Tunisia, Egypt, Turkey, and Iran.

The report predicts that relations between the US-led western powers and Russia will continue to deteriorate but not escalate dramatically. However, Putin’s actions are difficult to predict given that he can implement decisions fairly quickly.

On the Iranian front, the report reveals that Iran will aim to comply with the terms of the recent nuclear deal but without opening up to the world at least through 2016, given the local political divisions within Iran.